A recent Full Federal Court decision has held that the
Commissioner of Taxation may rank above other unsecured creditors
of a company even after the company is placed into liquidation by
serving what is known as a 'garnishee notice' on debtors of
a company to recoup taxation debts.
In the 2008 case of Commissioner of Taxation v Brunton Holdings
Pty Ltd, Brunton Holdings was the trustee of the Brunton
Educational Trust. Administrators were appointed to Brunton in
February 2007 and in late April 2007 Brunton was placed into
On 26 March 2007 the Commissioner issued Brunton with a Notice
of Assessment for the year ended 30 June 2004 for a debt of more
than $7.5 million.
In May 2007, after Brunton was placed into liquidation, the
Commissioner served 3 garnishee notices on a third party which held
in trust approximately $450,000 of Brunton's funds. The
garnishee notices directed the third party to pay to the
Commissioner the money held in trust rather than return it to
Brunton. The liquidators argued that the money held in trust by the
third party should properly be available to pay the costs and
expenses of the liquidators in winding up Brunton.
The key question for the appeal court concerned the rights of
the Commissioner to apply trust money to the payment of
Brunton's tax debt versus the rights of the liquidators to
apply the trust money to cover expenses they had incurred in the
The Commissioner's appeal was upheld and the Full Federal
Court held that the Commissioner can serve a garnishee notice on a
third party debtor of a company in liquidation and direct that any
debts owing to the company be paid to the Commissioner. This is
despite section 501 of the Corporations Act which provides that the
property of a company (on its winding up) must be used to satisfy
all of the company's debts equally.
The Practical Implications of the Decision
The key feature of this case is that the power of the
Commissioner to redirect debts owing to a company to satisfy tax
debts of the company in liquidation exists whether the garnishee
notice is served before or after the company is placed into
liquidation and that this process is not inconsistent with the
structure of the Corporations Act.
The fact that the Taxation Commissioner would even seek to gain
a priority over other creditors in these circumstances is somewhat
Prior to 1993 the Commissioner did in fact have a priority in
liquidations for PAYG amounts amongst other things as it was, and
still is, relatively common for small to medium companies
experiencing financial difficulty to have significant PAYG debts in
difficult economic times.
Concerns regarding the unfairness of the ATO priority,
particularly the impact it had on other creditors who are likely to
be unaware of the extent of debts owed to the Commissioner, and the
tendency of the Commissioner to allow tax debts to increase
unchecked, led to the priority being removed in 1993. As a trade
off for losing this priority the Commissioner received
extraordinarily wide powers to make directors personally liable for
PAYG debts of companies. This personal liability is automatic under
the director penalty taxation legislation, although the
Commissioner is required to send a notice to directors before legal
action to recover the claimed amounts is commenced. As the
Commissioner only has to send the notice, and the director does not
have to receive it, the first time many directors become aware of
this personal liability is when they are served with a court
While the Brunton decision raises important considerations for
insolvency practitioners and company creditors (in some
circumstances), it also serves as a timely reminder that in tough
economic times the Commissioner is aggressively pursuing company
tax debts, as well as chasing company directors personally.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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